• Alex Pettee, CFA

Peak Inflation? • Stocks Slump • REIT Dividend Hikes

Summary

  • U.S. equity markets slumped Tuesday as relief from a cooler-than-feared consumer inflation report was offset by unease over tax hike proposals set forth in the proposed tax-and-spending package.

  • Declining for six of the past seven sessions, the S&P 500 slipped another 0.5% today while the Mid-Cap 400 declined 1.1% and Small-Cap 600 fell 0.9%.

  • Real estate equities were among the stronger-performers today as the Equity REIT Index finished lower by 0.2% as gains from large-cap technology and residential REITs offsetting declines across other property sectors.

  • Consumer prices continued to rise near the fastest annual rate in decades in August, but showed some signs of moderation following three of the hottest months on record.

  • The wave of REIT dividend hikes continued with office REIT Kilroy Realty (KRC) boosting its dividend by 4%, becoming the 104th REIT to raise its payout this year.

Real Estate Daily Recap

U.S. equity markets slumped Tuesday as relief over a cooler-than-feared consumer inflation report was offset by unease over tax hike proposals set forth in a tax-and-spending package unveiled by Congressional Democrats. Declining for six of the past seven sessions, the S&P 500 slipped another 0.5% today while the Mid-Cap 400 declined 1.1% and Small-Cap 600 fell 0.9%. Real estate equities were among the stronger-performers today as the Equity REIT Index finished lower by 0.2% with gains from large-cap technology and residential REITs offsetting declines across other property sectors while Mortgage REITs slipped 0.4%.

All eleven GICS equity sectors were lower on the day, dragged on the downside by the Energy (XLE) and Financials (XLF) sectors. Equities followed a familiar pattern with early-session gains fading into the afternoon, pressured today by emerging details and analysis of tax hike proposals and predictions for which measures would make it into the final bill. Bonds were back in favor today as investors speculated that the cooler-than-feared CPI inflation data will give the Federal Reserve some breathing room as the central bank looks to eventually ease stimulus measures.

Inflation Shows Signs of Peaking

The BLS reported this morning that consumer prices continued to rise near the fastest annual rate in decades in August, but showed some signs of moderation following three of the hottest months on record from April through June. Core Consumer Prices - which excludes food and energy - rose 0.1% in August and 3.98% from last year, cooling a bit from the multi-decade highs set in June which was the largest annual increase since 1991. The headline CPI Index, meanwhile, rose 0.3% from last month and 5.20% from last year, which was roughly in line with consensus estimates. Declines in prices of used cars, airline tickets, and auto insurance offset a record-high surge in household furnishings prices and a rise in gasoline and energy prices.

It's too soon to declare victory over soaring inflation rates, however, as the effects of soaring rents and home values have just begun to filter into the data, but continue to be significantly understated. The CPI: Shelter index rose 0.2% from the prior month while the annual gain remains just 2.8% - a rather confounding statistic at a time that rents and home prices are each rising at double-digit rates across essentially all other data series. The Dallas Fed published a report last month highlighting the apparent data issues at the BLS, finding a 16-month lag between the BLS inflation series and real-time market pricing of home prices and rents, and the Dallas Fed researchers expect housing inflation to add 0.6-1.2% to the Core CPI index in 2022 and 2023.

Equity REITs

Net Lease: Today, we published Net Lease REITs: High Yield Is Back which analyzed second-quarter earnings season and recent developments in the net lease sector. Riding the wave of dividend hikes across the real estate sector this year, net lease REITs are once again an attractive source of relatively stable high-yield income. Strong earnings results confirmed that net lease REITs are again on the offensive as it's back to business-as-usual for these REITs with acquisition-fueled growth kicking back into gear while rent collection fully normalized. The recent pullback appears to be a buying opportunity for many mid-size and smaller high-yielding REITs, which are trading at wider-than-warranted discounts to their large-cap and growth-focused peers.

Speaking of dividend hikes, the wave of REIT dividend increases continued over the last 24 hours. Office REIT Kilroy Realty (KRC) gained 0.6% today after it boosted its dividend by 4% to $0.52/share, representing a forward yield of roughly 3.2%, becoming the 104th REIT to raise its payout this year. Yesterday, net lease REIT Store Capital (STOR) boosted its dividend by 6.9% while small-cap BRT Apartments (BRT) increased its payout by 4.5%. Following the wave of pandemic-driven dividend cuts across the REIT sector last year, we've seen a similarly powerful wave of dividend increases this year.

Industrial: Monmouth Real Estate (MNR) jumped 2.3% today after announcing that it has restarted its strategic review and will "consider all viable proposals, including proposals submitted by Starwood Capital or other potential counterparties." The announcement comes after MNR shareholders voted against the proposed combination with Sam Zell-led office REIT Equity Commonwealth (EQR). Last month, MNR's board rejected Starwood's increased bid of $19.20 per share, and noted today that it is "no longer subject to the restrictions that were in place under the prior merger agreement regarding engagement with third parties, solicitation and proposals."

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished lower by 0.6% today but remain higher by 0.6% on the week. Commercial mREITs declined 0.5% today but are still higher by 0.7% this week. Redwood Trust (RWT) gained 0.7% today after it boosted its dividend by 17% to 0.21/share quarterly dividend, representing a forward yield of roughly 6.7%. Elsewhere, Chimera Investment (CIM), Dynex Capital (DX), New York Mortgage (NYMT), and AGNC Investment (AGNC) each maintained their dividend at their current rates. The average residential mortgage REIT now pays a dividend yield of 9.0% while the average commercial mortgage REIT pays a dividend yield of 6.9%.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower by 0.26% today, on average, but outperformed their respective common stock issues by an average of 0.35%. So far in 2021, REIT Preferred stocks are higher by 11.12% on a price return basis. Over in the bond markets, Kimco Realty (KIM) priced a $500M offering of 2.25% notes due 2031. Piedmont Office (PDM) priced $300M of 2.750% senior unsecured notes due 2032. Extra Space (EXR) priced $600M of 2.350% Senior Notes due March 15, 2032.

Economic Data This Week

The economic calendar heats up again throughout this week, highlighted by today's CPI Index data. On Thursday, we'll see Retail Sales data for August, which is expected to decline for the second straight month and continue a moderation from recent stimulus-driven record-highs in April. We'll also be watching Consumer Sentiment data on Friday after posting one of the largest declines on record last month, driven by concerns over inflation and the reacceleration in COVID cases in the U.S.

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Disclosure: A complete list of holdings and Real Estate and Housing Index definitions and holdings are available at HoyaCapital.com. Hoya Capital Real Estate advises an Exchange Traded Fund listed on the NYSE. Hoya Capital is long all components in the Hoya Capital Housing 100 Index.

Additional Disclosure: It is not possible to invest directly in an index. Index performance cited in this commentary does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. Data quoted represents past performance, which is no guarantee of future results. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy.

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